Consolidation, War, And A Lousy Economy

It doesn’t seem fair. Okay, after the 90s, some economic slowdown was inevitable and most industries now have to deal with it. Skateboarding, after a few years of simply spectacular growth, was due for a consolidation, and we’re getting it in spades. War, of course, isn’t good for already-soft consumer spending-too many people staying home to watch the war on TV. And just to make things perfect, the weather hasn’t exactly cooperated. The East Coast has had its first real winter in a few years.

Any one of the four would have been a pain in the ass for business. All four simultaneously is downright inconvenient. Let’s put this in a little perspective and try to separate the good from the bad and the ugly, to coin a phrase.

Current Circumstances

Everything I’ve read and everybody I’ve talked to who remembers it, tell me skateboarding declined by nearly 90 percent in and around 1990. It declined dramatically-some have said nearly vanished-and I guess at its nadir, only one skatepark was operating in the country.

That scenario will never be completely out of the thoughts of people who experienced it, but it’s unlikely that it will be repeated. There are too many skaters, too many skateparks, too much exposure, and too much involvement and dependence on the part of too many organizations for that to happen again.

My guesstimate, based on being in a few stores and talking to some people, is that hardgoods sales are down north of 30 percent compared to a year ago. They may not be through dropping yet. I don’t know if traffic is down, but parents, I suspect, are less likely to fork over the dough their little munchkins need to buy a new deck.

I haven’t been able to get a solid fix on whether shoe sales are soft or not. I wouldn’t be surprised if market softness in shoes manifested itself as lower pricepoints rather than the big volume decline that seems apparent in hardgoods. You need shoes no matter what, and shoe margins are better than deck margins to start out with.

With those general comments as background, let’s talk about three specific issues that may give us some insight into where skateboarding is going-the number of brands, the role of distribution, China, and how skate compares to other action sports. I guess that’s four. Oh well.

Brands

One thing about this market that’s neither good, bad, nor ugly but just downright strange is that I haven’t seen brands going out of business. Typically, when times get tough, especially in an industry that’s grown quickly, some brands just don’t make it. I’ve heard of a couple of companies that are for sale, and I know of a brand or two that’s having a hard time, but they have gone away. I wasn’t expecting mass extinction, but I thought we’d have seen some serious consolidation by now.

I feel strongly both ways about this. On the one hand, companies that manage to hang on for a while by the skin of their teeth when they have no viable way to compete make it harder for stronger companies to prosper (Although retailers may get some really good deals!). On the other hand, small companies, scrapping to build a market position and less conservative than their larger, more stable brethren, can be a fountain of new ideas. That’s always a good thing.

Why haven’t we seen more consolidation? I have the following speculations. First, I’ve been surprised by just how well most companies have reacted to a slowdown in business. I perceive a faster-than-normal movement toward control of expenses and inventories. That can prolong survival, although it doesn’t solve the basic problem of brands that don’t have a defendable market position. Second, a number of brands/companies that have appeared in recent years are backed by companies that can afford to lose a whole lot of money for so-called “strategic” or “positioning” reasons. This seems particularly true in shoes and apparel. In hardgoods, I don’t think we have as many small companies as we used to. Some consolidation has alreadhappened there.

I do ultimately expect to see fewer brands, especially in shoes and hardgoods. How that shakes out will depend in no small way on distribution, so let’s move on to that.

Distribution

The major hardgoods brands are dependent on the specialty shops and distributors for much of their sales. Specialty shops are hit by both economic softness and the decline in skateboarding sales. The successful footwear and apparel companies have diversified and expanded their distribution. The hardgoods brands have generally been unable to do that. People need shoes and clothes all the time, although they may require that the stuff costs less. People don’t necessarily need a skateboard. If they do, it’s as likely as not to be a blank or a shop deck.

The hardgoods industry is reaping what it has sown by selling basically the same products for years with all the differentiation being based on marketing. Inevitably, consumers got smarter and price got to matter. When skating isn’t quite as cool at it was and the economy sucks, price matters a lot. Not that I wouldn’t have done the same thing if I’d been running a skate hardgoods company, but the result was predictable, and I think I’ve discussed it in this column before.

Meanwhile, the shoe and apparel companies, operating in a much larger market, get larger. Their sales are less dependent on the popularity of skate, or at least they are all trying to make them less dependent. When the downturn comes, they are selling products everybody needs, they are not just selling to the skate market, there’s less seasonality, and their size gives them some financial flexibility smaller companies don’t have. What I mean is that even if they should earn less money because their gross margins fall, they still earn enough gross margin dollars so that they don’t have to gut their marketing and product development efforts. Smaller companies may not have that option.So distribution matters in who prospers or even survives in a consolidation. Having a bigger potential customer base and more possible outlets for your products helps. More on this in the section on other action sports below.

China

This, strangely enough, comes under the heading of “good.” In the past I’ve said that cheap Chinese decks could take over the skateboard market like in so many other wood products, if the market was big enough to make it worthwhile. Now it appears, until the market recovers and growth resumes, that it won’t be worthwhile. The Chinese can continue to have the cheap complete market in the chains as they always have, but I’m no longer as concerned that they will get a significant position in the higher-end branded market.

I know the apparent price difference has made it compelling to try to get decks from China. But nobody had suggested to me with any conviction (except the Chinese) that the quality problem is resolved. I also believe, and have argued in this space before, that the apparent gross-margin improvement is an illusion for the industry as a whole over the medium to long term. If the quality problem was resolved, and one brand started bringing in Chinese decks, other brands would tend to do the same. Natural competitive pressures would inevitably lead to somebody discounting to retailers, who would eventually figure out what was going on and would demand some of that margin for themselves. At the end of the day, unless a whole lot more decks were sold, the overall industry might find itself with fewer total margin dollars to play with. Of course, the consumer would be happy.But why bother even discussing this? If the quality’s no good you’ll kill your brand with serious skaters, and if it’s good you’ll just end up in the same boat as all the other brands again, although some with their own manufacturing plants might be hurting. So why bother? I mean nobody could really think this would work in the ‘core market, could they?

Synthesis

In surfing, the subject of the actual surfboards didn’t even come up at last year’s surf-industry conference. Sales in surf equal softgoods. I’m told that making money with surfboards is damn difficult due to competitive pressures, lack of product differentiation, and low volume. The softgoods brands in surf are selling their lifestyle across a wide and widening variety of retail distribution. There aren’t and will never be as many surfers as there are people who like the idea of surfing and the surf style. That’s where the money is.

In snowboarding, decks are very competitive for the same reasons. In bindings, and even more in boots, there’s been continuing, meaningful, product improvement, which has at least created a basis for competition other than just price and marketing. But product in all hardgoods categories is generally damn good. It’s durable, functional, and isn’t replaced as often as it used to be. As in surfing, softgoods and the expansion of brands into the lifestyle market are seen as an important source of profit and growth. Not perhaps as much as in surfing, because a significant percentage of snowboarding softgoods are basically for snowboarding in the same way that a wetsuit is only functional when you’re actually surfing.In surfing, the softgoods brands dominate the market. In snow, the leading hardgoods companies also have significant apparel lines that are both for snowboarding and have lifestyle components.

In skate, the important hardgoods companies are much smaller than the leading companies in either surf or snow. They don’t have the same possibilities of expanding their distribution and, mostly, they aren’t doing a lot of softgoods business. You shouldn’t hold your breath waiting to see one of the leading hardgoods companies grow to 300-million dollars in revenue.

Yet these are the companies and brands that set the tone for skateboarding, because that is what they are about and focused on. In the past, when skateboarding was much smaller and not nearly as mainstream, companies and brands just vanished in a down market and almost nobody noticed. What’s different this time is that these brands have value and are on more people’s radar screen.But that doesn’t change the financial equation-at some point a decline in sales, inability to expand distribution, and a need to maintain expensive marketing/team programs with inadequate gross margins means a company is losing money.

So skateboarding will be fine, but I expect to see some companies acquired. As divisions of larger organizations with certain shared functions, these companies make financial sense. On a stand-alone basis, some of them may not if current circumstances last very long. Let’s hope any acquirers treat what they buy with respect-if they don’t, I’ll be a lot less sanguine about the prospects for skateboarding.

Jeff Harbaugh is president of Jeff Harbaugh & Associates, an action-sports consulting firm that helps companies identify and focus on the things that are important to make money. Reach Jeff at (206) 232-3138 or at jharbaugh@msn.com. didn’t even come up at last year’s surf-industry conference. Sales in surf equal softgoods. I’m told that making money with surfboards is damn difficult due to competitive pressures, lack of product differentiation, and low volume. The softgoods brands in surf are selling their lifestyle across a wide and widening variety of retail distribution. There aren’t and will never be as many surfers as there are people who like the idea of surfing and the surf style. That’s where the money is.

In snowboarding, decks are very competitive for the same reasons. In bindings, and even more in boots, there’s been continuing, meaningful, product improvement, which has at least created a basis for competition other than just price and marketing. But product in all hardgoods categories is generally damn good. It’s durable, functional, and isn’t replaced as often as it used to be. As in surfing, softgoods and the expansion of brands into the lifestyle market are seen as an important source of profit and growth. Not perhaps as much as in surfing, because a significant percentage of snowboarding softgoods are basically for snowboarding in the same way that a wetsuit is only functional when you’re actually surfing.In surfing, the softgoods brands dominate the market. In snow, the leading hardgoods companies also have significant apparel lines that are both for snowboarding and have lifestyle components.

In skate, the important hardgoods companies are much smaller than the leading companies in either surf or snow. They don’t have the same possibilities of expanding their distribution and, mostly, they aren’t doing a lot of softgoods business. You shouldn’t hold your breath waiting to see one of the leading hardgoods companies grow to 300-million dollars in revenue.

Yet these are the companies and brands that set the tone for skateboarding, because that is what they are about and focused on. In the past, when skateboarding was much smaller and not nearly as mainstream, companies and brands just vanished in a down market and almost nobody noticed. What’s different this time is that these brands have value and are on more people’s radar screen.But that doesn’t change the financial equation-at some point a decline in sales, inability to expand distribution, and a need to maintain expensive marketing/team programs with inadequate gross margins means a company is losing money.

So skateboarding will be fine, but I expect to see some companies acquired. As divisions of larger organizations with certain shared functions, these companies make financial sense. On a stand-alone basis, some of them may not if current circumstances last very long. Let’s hope any acquirers treat what they buy with respect-if they don’t, I’ll be a lot less sanguine about the prospects for skateboarding.

Jeff Harbaugh is president of Jeff Harbaugh & Associates, an action-sports consulting firm that helps companies identify and focus on the things that are important to make money. Reach Jeff at (206) 232-3138 or at jharbaugh@msn.com.